BNY Mellon fined $1.5M by SEC for misstatements on ESG mutual funds

BNY Mellon told investors via mutual fund prospectuses, and in written responses to requests for proposals, the mutual funds it managed had received “proprietary ESG quality reviews” as part of the investment research process, according to the SEC. The agency determined while such reviews had been conducted for some of the managed mutual funds in question, they were not conducted for all of them.

Specifically, the SEC said BNY Mellon told investors the overlay funds in the managed mutual funds had received ESG quality reviews when they had not.

During the period from July 2018 to September 2021, numerous equity and/or corporate bond investments held by certain BNY Mellon overlay funds did not have an ESG quality review score at time of investment, as was promised in the fund’s prospectus, the SEC alleged. From January 2019 to March 2021, 67 of 185 investments in one overlay fund did not have an ESG quality review score, comprising nearly 25 percent of the fund’s net assets as of March 31, 2021.

BNY Mellon’s representations “were incomplete because they did not also state that the sub-adviser could and did select portfolio investments that were not necessarily subject to that aspect of the research process,” the SEC’s order said.

Without admitting or denying the SEC’s findings, BNY Mellon agreed to pay the fine, be censured, and to cease and desist from future violations of securities law.

“Registered investment advisers and funds are increasingly offering and evaluating investments that employ ESG strategies or incorporate certain ESG criteria, in part to meet investor demand for such strategies and investments,” said Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force, in a press release Monday. “Here, our order finds that BNY Mellon Investment Adviser did not always perform the ESG quality review that it disclosed using as part of its investment selection process for certain mutual funds it advised.”

Compliance takeaways: BNY Mellon lacked adequate policies and procedures to prevent inaccurate or materially incomplete statements in prospectuses for its mutual funds and “failed to adopt and implement policies and procedures reasonably designed to prevent the inclusion of untrue statements of fact in prospectuses or the inclusion of misleading statements in [request for proposal] responses or to the overlay funds’ boards,” the SEC’s order said.

The company cooperated with the SEC’s investigation, providing detailed factual summaries and making substantive presentations on key topics, according to the order. BNY Mellon also revised disclosure language and modified relevant processes, policies, and procedures, the order said.

BNY Mellon response: “While none of these funds were part of the BNYMIA ‘Sustainable’ fund range, we take our regulatory and compliance responsibilities seriously and have updated our materials as part of our commitment to ensuring our communications to investors are precise and complete,” the company said in an emailed statement. “We are proud of our heritage and track record in responsible investment and are committed to continuing to be a trusted partner for our clients’ responsible investing needs.”